Funds Hub

Risk revolution

By Dunny P. Moonesawmy, Head of Fund Research for Lipper in western Europe, Middle East and Africa. The views expressed are his own.

The evaluation of an investment is measured by its potential performance and risk, and historically, investors have given more importance to the former than the latter. Recent events in the market, however, have challenged the hierarchy, placing risk at the heart of investors’ thinking. It is little short of a revolution in the investment industry.

While performance is associated with opportunities, risk is linked with danger and the switch in thinking is prompting investors to take a more defensive approach.

There have been several factors behind that change. The market is more volatile and given to quicker and more abrupt downturns; there is a polarization of economic growth outside core western economies; demographic change has led to the growing importance of liability management; and regulatory constraints have put extra pressure on institutional players to limit risky investments.

Up to 1996, we enjoyed smooth growth trends in markets, with steady periods of drawdown and recovery. Over the past 15 years, however, the nature of market cycles has changed.

Periods of exponential growth have been followed by deep crises, creating opportunities for hedge-fund style managers but a nightmare for long-only managers trying to protect assets. Both institutional and retail investors have had a hard time during these two crises with significant consequences on their risk appetite. For a chart detailing the recent trends, click: http://r.reuters.com/gef88r

Data from Lipper shows 10.18 percent average annual growth of the MSCI World TR in dollar terms between 1970 and 1980, 16.3 percent the following decade and 15.92 percent in the 1990s. The figure stood at only 1.77 percent during the last decade due to the two major downturns — the bursting of the internet bubble and the credit crisis.

Where there’s muck…

Pensions schemes are in trouble, but those attempting to get them out the mire are seeing some money-spinning opportunities.

Corporate retirement funds that have promised to pay workers based on their final salaries have long been heading for difficulties as we humble drones have the temerity to live longer than anyone thought possible. Combine that with roller-coaster markets and unpredictable inflation and interest rate prospects and trustees start hunting around for a golden bullet.

For fund firms it might look a little dull. You kick off with a bit of low margin hedging here and there, relying on volume to turn a decent profit.

But increasingly the risk budget that these Liability-Driven Investment (LDI) strategies can take off the table can be put to work elsewhere — think active fixed income funds, equity derivatives or absolute return funds — to seek growth for the scheme and more margin for the fund firms involved.

You can read our story by following the link below:

http://uk.reuters.com/article/idUKLNE67O02N20100825

Exporting Insight

BNY Mellon Asset Management which today acquired Lloyd’s fund management unit- Insight Investment- for 235 million pounds is betting on a boom in liability driven investment (LDI) to boost its coffers over the coming years.

Vice chairman Jon Little told us that Insight’s fixed income and absolute return businesses were expected to grow rapidly, but it’s Insight’s LDI business that seems to have played the decisive role in the deal.

“Over time most pension plans will look at some form of LDI type investment strategy – so this is a huge market for us. And this is not a trend just in the UK. It is an emerging theme in the US, Holland, Germany and Japan,” Little said.

The next steps for BNY would be to take Insight’s capabilities in LDI, fixed income and absolute returns to clients outside UK.